Flow of funds: Agencies Q2 2004

During the second quarter of 2004, prices of bonds of U.S. government agencies and government sponsored enterprises fell, indicating that the main motivated sellers were the agencies and GSEs (as issuers) and their related mortgage pools.

The motivation of issuers of agency bonds was to raise funds to meet demand for mortgages from households that was running at somewhat reduced levels than in the past, despite Federal Reserve low interest rate policies.

Money market mutual funds also sold agency securities out of portfolio in a reallocation of assets from agencies, treasuries, and open market paper into bank deposits (foreign, savings, and checking) and municipal securities.

Principal Buyers: Foreign Investors

As in the market for treasury bonds, the principal buyers of agencies were foreign investors and domestic households. Foreign investors were interested in investing dollar resources accumulated from record deficits in U.S. international trade.

Domestic households reallocated financial assets from equities, money market funds, and corporate bonds into agency bonds, treasuries, time and savings deposits, and mutual fund shares. (The movement out of equities was consistent with a long-term trend.)

The persistent behavior of the agencies and GSEs has been to raise funds from a diversified group of investors to finance home mortgages, making equity in residential real estate the main asset of most Americans.

Despite low interest rates, the level of debt issued by agencies and related mortgage pools in the second quarter of 2004 was about half to two-thirds of levels in recent years.

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